Iseo Summer School 2011 1 Growth Acceleration In Late 18 th Century - - PowerPoint PPT Presentation

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Iseo Summer School 2011

Growth Acceleration In Late 18th Century

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Population Growth

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Two Centuries of Divergence

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Different Growth Trajectories More Recently

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Times for the Full Journey

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Economists’ Forecasts

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Incidence of Poverty Less than $1.25 per day

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Gini Coefficients

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Saving and Investment

Savings and Investment in India and China

5 10 15 20 25 30 35 40 45 1980 1984 1988 1992 1996 2000 2004 Investment Rate (% of GDP) India Savings Rate (% of GD) India Gross capital formation (% of GDP) China Gross savings (% of GDP) China

Poverty in China and India

5 10 15 20 25 30 35 40 45 1987 1990 1993 1996 1999 2000 2001 China Poverty gap at $1 a day (PPP) (%) China Poverty gap at $2 a day (PPP) (%) India Poverty gap at $1 a day (PPP) (%) India Poverty gap at $2 a day (PPP) (%)

Income Inequality

GDP per capita: China and India (constant 2000 US$)

200 400 600 800 1000 1200 1400 1600 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 India GDP per capita (constant 2000 US$) China GDP per capita (constant 2000 US$)

Rural Populations Decline

Rural Population Percentage 50 55 60 65 70 75 80 85 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 China Rural population percentage India Rural population percentage

Leveraging the Global Economy

Trade in Relation to GDP China

10 20 30 40 50 60 70 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 China NE.IMP.GNFS.ZS Imports of goods and services (% of GDP) China NE.EXP.GNFS.ZS Exports of goods and services (% of GDP)

Trade in Relation to GDP India

5 10 15 20 25 30 35 40 45 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Imports % o f GDP India Exports % of GDP India

Trade in Relation to GDP India

5 10 15 20 25 30 35 40 45 1 9 8 1 9 8 2 1 9 8 4 1 9 8 6 1 9 8 8 1 9 9 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 2 2 2 4 Imports % o f GDP India Exports % of GDP India

Literacy Rates: India and China

10 20 30 40 50 60 70 80 90 100 Literacy adult women China Literacy adult men China Literacy adult women India Literacy adult men India 1990 2004

Middle Income Transition is Difficult

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Five High Speed Transitions

• Japan
• Korea
• Taiwan
• Hong Kong
• Singapore
• China entering the middle income transition

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Crisis and Developing Countries

• Two channels of Impact

– Exodus of capital and credit tightening – Huge fall off in trade

• Fast Recovery

– Domestic ownership in financial sector – Rapid response by central bank – Trade bounced back – Reserves – No toxic assets – Absence of household balance sheet damage

• EM’s had v-shaped recovery that policy makers and

markets in advanced countries expected

• Latter missed the structural reasons for the new normal

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Sustainability of Growth in EM’s?

• Baseline case with extended slow growth in advanced

economies – the growth is sustainable – Economic size – Trade within EM group – Higher incomes and closer match between demand and supply sides of the economy

• Risks

– Major repeat downturn in advanced countries – Serious outbreak of protectionism – Mishandle the current distortions caused by advanced country recovery policies

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Evolving Structure of Global Economy

– G20 85% of GDP and 66% of population – EM’s + will pass 50% of global GDP within a decade – Impact on advanced countries larger – Asymmetries declining – They are good at structural change and we are less so – Old Hybrid’s won’t work

• Example, post Bretton Woods international

currency system – China second largest economy in world

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Partial Decoupling

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G20 and The Crossroad in the Global Economy

• The advanced countries and the major emerging economies
• Accounts for 85% or more of global GDP
• About 2/3 of world population
• Post crisis, it is the entity that sets priorities, manages the

global economy and financial system, seeks to achieve cooperative outcomes

• Replaces the G7/8
• It is too soon to tell if it will be effective at this.
• The developing economies are within a decade of going past

50% mark of world GDP – They have systemically important effects on the global economy – this is new

• Many old models will have to be changed in this shifting

landscape

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In the consensus global growth scenario, the global investment demand could increase to about 25 percent of GDP by 2030

20 2030 25.1 27 26 25 24 23 22 21 20 24.8 10 21.4 20.8 2000 90 80 26.0 1970

CONSENSUS GLOBAL GROWTH SCENARIO

1 Based on actual prices and exchange rates of each year. 2 Shown in 2005 prices and exchange rates. 3 Forecast assumes price of capital goods increases at same rate as other goods and assumes no change in inventory.

Projection in real terms2,3 Historical trend in real terms2 Historical trend in nominal terms1

SOURCE: Economist Intelligence Unit; Global Insight; McKinsey Global Economic Growth Database; Oxford Economics; World Development Indicators of the World Bank; MGI Capital Supply & Demand Model; McKinsey Global Institute

Global investment rate, 1970–2030 % of global GDP

Asia

• East and South
• The two future economic giants (China and with a lag India)
• 3.8 million people (58% of world population)
• Economic concentration is declining now
• That will reverse in about 10 years
• Global GDP will triple in 30 years or less

– Older growth models will not work – Natural resources and the environment won’t hold up

• Asian growth will affect or determine many things

– Sustainability – Governance – Levels of investment and costs of capital

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China

• Second largest economy
• Largest export destination for Korea, India, Brazil,

Australia, probably Japan soon

• EM growth is dependent on China’s sustained growth

– In investment terms they are correlated through China

• China is entering a complex set of structural changes on

the demand and supply side

• Generally called the Middle Income Transition (or Trap)

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China

12th five year plan outline just published in Chinese

• Divided into 12 parts, the proposal provides the basis for

drafting the 12th five-year program. It includes accelerating transformation of economic development pattern, further expanding domestic demand and pushing forward the modernization of agriculture.

• The proposal also stresses development of a modern

industrial system, coordinated development of all regions, and the building of an energy-efficient and environmentally-friendly society in the coming five years.

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• Acceleration of the transformation of the economic

development pattern was a profound reform and should proceed throughout all sectors of economic and social development, while economic strategic restructuring should be a major task in the transformation, according to the proposal.

• Reform is a powerful driving force for the transformation

and should be pushed forward in all sectors with greater resolve and courage. "Great impetus will be given to economic restructuring, while vigorous yet steady efforts should be made to promote political restructuring," says the proposal.

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• Meanwhile, the document says China will nurture and

develop seven new strategic industries with favorable policies in the next five years.

• new-generation information technology, energy-saving

and environment protection, new energy, biology, high- end equipment manufacturing, new materials and new- energy cars.

• China is still in an important period of strategic
• pportunities during which there is a great deal China

can achieve, and it is faced with both precious historic

• pportunities and plenty of foreseeable and unforeseeable

risks and challenges, the document says.

• Premier Wen added an emphasis on social development

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Parallel Shifts in Structure

• Middle income transition in China

– Major internal evolving structural Change

• Shifting macro structure of national income and saving
• Global rebalancing of aggregate demand
• The crisis and China’s growing size has made all of the

above more immediate and urgent – Domestically and in the Global Economy

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PPP Adjustment

5 10 15 20 25 % of world GDP GDP : Purchasing power parity 80 85 90 95 00 05 US Japan China France

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Trade

2 4 6 8 10 12 14 % of world exports Exports 78 83 88 93 98 03 08 US Germany Japan China

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Evolution of China Current Account Balance

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5 10 15

% of GDP China: BOP 78 83 88 93 98 03 08 Trade balance Current account balance

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Reserves in China

500 1000 1500 2000 0.0 5.0 10.0 15.0 20.0 25.0 30.0 US$ bn China: International reserves % of world reserves 78 83 88 93 98 03 08

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Recycling Capital

Net private capital inflows + Current account surplus Reserves Current Account Deficit + Net private capital outflows

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China Rising Trade Exposure

• Even as domestic economy becomes larger

10 20 30 40 % of GDP China: Exports 78 83 88 93 98 03 08

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Very High Investment Rate More than Fully Funded From Domestic Savings

10 20 30 40 50 % of GDP China: Savings and Investment 87 92 97 02 07 Saving s Investment

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USA Declining Savings Resulting from Financial Disequilibrium

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Global Surplus and Deficit Patterns

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Disposable Income Declining as Percentage of GDP

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Components of Savings: The Increase is in the Corporate Sector

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Comparative International Income Data

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Consumption in Relation to GDP

35 38 41 44 47 50 % of GDP China: Household consumption 90 92 94 96 98 00 02 04 06 08

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Moving to Increase Household Consumption

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Over Emphasis on Exchange Rate

• Krugman in NYT
• Exchange rate is one policy instrument for promoting

structural change and reductions in excess savings

• But not sufficient
• Both US and China economies need deeper structural

shifts at macro and micro levels

• Dollar needs to depreciate as part of the adjustment in

the US – The appreciation in the first 6 months of the crisis was abnormal – driven by capital adequacy problems

• Probably not a good idea to follow the dollar down for

domestic and international reasons

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A Wide Array of Policies Are Needed to Support Longer Term Structural Change

– Raising household income – Lowering household savings via social insurance – Education – Public sector investment in research – Broader array of equity financing mechanisms – Transition policies for declining industries that must be let go

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Demand Growth

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China: Shifting Micro-Structure of the Economy

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Post- Crisis USA Economic Condition

• US household saving rate up permanently
• Effect on global aggregate demand – shortfall of $1

trillion – Muted in short run by fiscal stimulus and deficits (many countries)

• Increases incentives/pressure for protectionism
• Slows global growth
• “New normal” – slower growth in advanced countries
• A decline of 1% in advanced country growth is, another

$350 billion annual shortfall

• Structural Challenges (there before but partially hidden

from view

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Council on Foreign Relations

Structural Change in Advanced Countries Challenges for Growth and Employment

• Structure of the global economy is evolving rapidly
• New structural issues for advanced economies
• Distributional effects of global integration are important
• Impact is different on subgroups within advanced

countries

• We look look at the USA and briefly at Germany (a work

in progress)

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Tradable and Non-Tradable Goods and Services

• Non-tradable

– Proximity matters – Offshore production and transportation too expensive – Doesn’t just mean heavy – Government, construction, health, legal services, hospitality (hotels restaurants etc) – Retailing

• Tradable

– Produced offshore and consumed domestically – Autos, industrial machinery, some agricultural products, information and knowledge intensive services

• Boundary is constantly shifting mostly in favor of

tradable sector expansion

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Employment

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Change in Employment

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Germany

• Major productivity and competitiveness problem in 2000
• Business, labor and government collaboration
• Reforms

– Labor markets – Income growth versus jobs – defacto deflation – Clusters and support institutions – Kept a healthy advanced manufacturing sector.

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